Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry June 20th, 2022 - June 24th, 2022
June 29, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Transactional Activity: There were two more transactions and a $35.0 million higher volume than last week. One more transaction closed than the previous year, but volume fell by $57.2 million. The average deal size was $8.7 million this week vs. $25.1 million in the same week last year.
Cannabis capital raises are off 64.1% YTD. Equity issuance is off 76.1% y/o/y overall, with a more significant 81.6% decline in Canadian equity financing. Debt, at 53.9% of total capital raised, is at its highest in history for comparable periods. The graph below shows that U.S. activity dominated capital raises for the first twenty-two weeks of 2022. Public companies accounted for 73.3% of total financing YTD, down from 84.5% in 2021.
The Cultivation & Retail sector has had an even steeper 70.4% drop in capital raises YTD. The chart below shows the 90.1% decline in YTD equity financing. Debt has accounted for 77.5% of total sector capital raises YTD, heavily focused on U.S. companies.
There were five capital raises totaling $43.4M this week, 41% below the LTM average.
Cannabis stock prices (measured by the MSOS ETF) declined by 2.41%% last week, reaching a new low since the ETF's creation. The ETF is down 55.7% YTD compared to a 17.9% decline in the S&P 500. Cannabis has faced a perfect storm: slow progress on any federal legal reforms, sharp decreases in broader markets (and yes, cannabis IS correlated), a restricted capital market, and the dual margin threats of inflation and recession.
In the absence of legislative changes and oblivious to the operational improvements at the MSOs, the market seems prone to go lower with the overall market.
We are not comfortable that analysts have factored in the margins pressures from stagnant to declining wholesale prices mixed with significantly higher energy and other input costs.
It remains to be seen how cannabis will fair in what may be history's most widely anticipated recessions.
The critical differences in the expected downturn versus the last one that left cannabis untouched are that 1) We see little chance of new COVID-related shutdowns, and 2) we think there is virtually zero chance for another round of stimulus. All of which add to an economic downdraft that could be less favorable for cannabis.
Despite all the negatives, cannabis is spectacularly undervalued. Our Viridian Capital Chart of the Week, copied below, shows the case for cannabis quite well. With the second-highest growth rate of the 12 industries we surveyed, cannabis EV/2023 EBITDA is drastically lower.
The most significant change in our YTD Sector performance was the sinking of U.S Tier 1 MSOs into the worst-performing sector slot. Viridian Equity Research has steadfastly recommended the Tier 2 and Tier 3 companies, which have happily been two of the best-performing YTD sectors. We ascribe part of this outperformance to their attractiveness as acquisition candidates.
Best and Worst Performers of the Week and YTD
Sundial Growers (SNDL: NASDAQ) was the week's best performer. All of the top 5 were Canadian LPs. The strong performance of Canadian stocks seems to be related to the introduction of the CLIMB Act. This Bill would offer safe harbors for U.S. cannabis companies to list on senior exchanges like the NASDAQ and NYSE. The Bill would also presumably allow for the completion of the acquisitions of U.S. Cannabis companies by Canadian entities, such as Canopy Growth's (NASDAQ: CGC) purchase of Acreage (CSE: ACRG.A.U, ACRG.B.U). We think the probability of this Bill passing is exceedingly low. Still, the fact that its introduction can produce double-digit gains in related stocks says a lot about the current psychology of the cannabis equity markets.
The Only Closed Equity Transaction: On June 23, 2022, Neptune Wellness Solutions (NEPT: NASDAQ)( NEPT: TSX), an integrated health and wellness company focused on plant-based lifestyle brands, closed a registered direct offering of Units for gross proceeds of $5M.
- 3.891M units were sold at $2.57 per unit.
- Each unit consists of one common share and two shares of warrants. The warrants are divided into two series. Both have exercise prices of $2.32 per share (a 9.7% discount to the unit price). One series has a two-year expiration, and one series has a five-year expiration.
- These two series of in-the-money warrants are highly dilutive. We value the two-year warrants at $.62 per share and the five-year warrants at $.93 per share. Subtracting these from the Unit price produces a Net Share Price of only $1.02 per share, the largest warrant-based net share price discount we have ever observed.
- It is no wonder that NEPT's share price dropped 46% from $2.79 before the announcement to $1.5 post-closing.
- The transaction implies a market cap of $38.6M and an enterprise value of $54.5M representing an EV/NTM Rev of .37x, a discount to the .57x multiple of the company's peer group of Infused Products & Extracts companies with market caps between $10M and $200M. The graph below shows that Neptune has narrowed its discount to its peer group during 2022.
The proceeds of the transaction will support working capital. Neptune had approximately $55M of negative cash flow from operations in the four quarters ended December 2021. The company will announce its fiscal year-end March 2022 results on June 29, 2022. Given the cash burn, we expect liquidity to remain tight and believe Neptune will require additional financing within the next six to nine months.
Public Company Listings: All five companies that raised capital this week were public. All trade in Canada (two on the TSX, three on the CSE) and the U.S. (three on OTC, two on NASDAQ).
Equity vs. Debt Cap Raises: Equity accounted for one of this week's raises and 11.5% of the funds raised.
Debt accounted for 91% of trailing 4-week capital raises. We expect debt to hover around its recent trendline of around 70% of cannabis capital raises.
The Week's Largest Debt Raise: On June 24, 2002, iAnthus Capital Holdings (IAN: CSE)(ITHUF: OTCPK), an MSO with operations & investments in 9 states, including Massachusetts, New York, New Jersey, Maryland, Florida, Nevada, and Arizona, announced the completion of its Recapitalization Transaction first announced in July 2020.
- The Recapitalization will reduce total debt from approximately $220M to about $140M
- Existing Sr Secured debt of approximately $136M will receive $99.7 million of 8% Sr sec debentures due 6/24/27, $5M of 8% unsecured debentures due 6/24/27, and 48.625% of iAnthus common stock.
- Existing unsecured debt of approximately $59M will receive $15M of the 8% unsecured debentures and 48.625% of the common stock
- Existing shareholders will be diluted to 2.75% ownership of the common stock.
- Following the closing of the Recapitalization transaction, certain Secured Lenders and Unsecured Lenders acquired $25M additional secured debt of the same form issued to the secured lenders in the recap. The proceeds will be used for working capital and general corporate purposes.
- To calculate a rough approximation of the company's Enterprise Value and Equity Value post Recap, we looked at the Cultivation & Retail companies in the Viridian Value Tracker database with LTM revenues of between $100M and $300M and calculated EV/LTM Revenue for each of them. The results in the table below show that the aggregate Enterprise Value to LTM Revenues is 2.2x, and the median of the individual companies is 1.85x.
We used a more conservative multiple of 1.5x to apply to iAnthus LTM revenues of $194M to obtain an enterprise value of $291M and an equity value (based on new outstanding debt) of $151M.
Both secured and unsecured debt appear to be getting better than full recoveries (subject to a detailed calculation of accrued and unpaid interest, which we have not undertaken here).
One reasonable question is whether $140M of debt is too much? Assuming the company can earn 25% EBITDA margins on its $194M LTM revenues, we calculate an approximate Debt/EBITDA of 2.88x, within the range of the peer group above. Despite that logic, iAnthus is not currently earning 25% EBITDA margins, so we view the recapitalized debt load as higher than we would like to see, especially given inflationary cost pressures and a weakening economy.
MERGERS & ACQUISITIONS
Transactional Activity: Three M&A transactions closed this week with a total disclosed transaction value of $5.24M compared to seven transactions for $541.15M in the prior year.
Total YTD M&A volume is down 79.8% from 2021, with $3.74B in consideration and 101 deals closed versus $18.45B in transaction value and 167 closings in 2021. Last year's total included two of the largest M&A transactions ever done in cannabis, the $4.5B Tilray acquisition of Aphria and the $7.2B Jazz Pharma acquisition of GW Pharma. Without the two megadeals mentioned above, the volume in 2022 would trail 2021 by 45% YTD.
U.S. volume is down 55.0%, with 37% fewer transactions. The average transaction size of $38.0M is down 28.4% from 2021. Still, it is expected to grow considerably as large public/public transactions like Cresco/Columbia Care and Verano/Goodness Growth close in the 4th quarter.
Major Pending Deals Risk Arb
Cresco/Columbia - a deal with a long time horizon and significant challenges to completion.
- Significant overlaps require asset/license sales.
- Significant integration challenges.
- Relatively low initial premium to market paid.
The Cresco/Columbia deal spread narrowed 280 bp to 12.2% on 6/24/22. The key driver of this spread is the time to close. The widening may reflect skepticism about the asset sales necessary for this deal to close.
Verano/ Goodness Growth – a transaction we initially believed would close in the 2nd quarter of 2022 is now a 4th quarter event according to Goodness Growth management. The spread on this deal widened 160 bp to 12.5% as of 6/24/22. This deal spread may reflect market skepticism about how quickly New York is issuing regulations for the original license holders, including Goodness Growth. We are surprised to see this spread wider than the Cresco/Columbia spread, a deal with ostensibly more moving parts complicating closing.
The valuation gap between the largest MSOs and the less than $300M market cap group, which are their primary targets, has been a significant driver of M&A activity since it creates the regular opportunity for accretive transactions. The gap has averaged around 4 points in 2022 but narrowed to a three-month low of approximately 2.84. History has shown that this valuation gap tends to expand in up and contract in down markets.
The largest M&A Deal of the Week: On June 21, 2022, Jupiter Wellness (JUPW: NASDAQ), a company engaged in the development of cannabidiol-based medical therapeutics and wellness products, acquired 100% of the assets of Applied Biology Inc. (Private), a leading biotechnology company specializing in hair and skin sciences.
- Acquisition consideration is up to 4M shares of Jupiter Wellness, deliverable on the completion of certain milestones. At the closing price of $.81, the stock was worth $3.2M, a multiple of .4x Applied Biology's $8M of 2021 revenue and 1.06x 2021 EBITDA. The deal is immediately accretive given Jupiter's negative LTM EBITDA.
- The acquisition will also accelerate and expand Jupiter's development pipeline.
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:
- Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)
- Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)
- Principals to the Transaction (Issuer/Investor/Lender/Acquirer)
- Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
- Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)
- Credit Ratings (Leverage and Liquidity Ratios)
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About Viridian Capital Advisors, LLC
Viridian Capital Advisors (www.viridianca.com) is a financial and strategic advisory firm dedicated to the cannabis market. We are a data- and market intelligence-driven firm that provides investment, M&Amp;Amp;A, corporate development, and investor relations services to emerging growth companies and qualified investors in the cannabis sector. Our banking practice, through broker-dealer Bradley Woods & Co. Ltd. (Member FINRA/SIPC), provides capital and M&Amp;Amp;A services to fund the growth of our clients, while our advisory practice helps to position and build their businesses. Our team's decades of high level operating and transactional experience on Wall Street in a variety of emerging sectors, allows Viridian to provide comprehensive strategic and financial solutions that assist cannabis enterprises in realizing their full potential.
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